10 signs your stocks are about to tumble

Commentary: Winter’s rally is over and bears are hungry

Editor’s note: This column is the first in a two-part series. Part two can be found here.

ROCKVILLE, Md. (MarketWatch) — As U.S. stocks hover at record highs, many investors rightly wonder if the rally will last.

Unfortunately, it may not.

Don’t take my word for it. Check out these 10 negative headlines and economic data points that could trigger a 5% to 10% downturn over the next several months.

Feel free to share your own observations below. And for balance, check back Tuesday for 10 reasons the market could move even higher.

And join me online at 2 p.m. Eastern on Tuesday, March 19 for a live Twitter debate on the topic. Submit your comments on either the bull or the bear case to me at @JeffReevesIP and use the hashtag #bullorbear in your tweets.

1. Overextended buyers

As investors recently saw with Apple
AAPL, +1.84%
, a shortage of buyers means a shortage of upside. The broader market shows similar strain.

A great report (and chart) from Chris Kimble in early March indicated that cash in investor accounts were approaching the barest levels ever. Not only does this suggest a scarcity of buyers, it is ominous because low cash levels preceded both the 2000 and 2008 market collapse — and the 2011 mid-year contraction.

2. Valuations are stretched

The price-to-earnings ratio of the Standard & Poor’s 500-stock index
SPX, +0.18%
is a bit rich at almost 18, vs. a mean of 15.5 and a median of 14.5 for the market historically.

In a nutshell, Shiller P/E uses inflation-adjusted earnings across 10 years to determine valuation and avoid short-term noise affecting the data. And right now, that P/E is around 23, vs. a historical average of about 16. Furthermore, the pre-recession peak of the market in late 2007 boasted a Shiller P/E of around 28. So using both short-term and long-term data, the market appears to be slightly overbought.

4. Breadth is weak

The major indices have been hitting new highs, but it’s important to note that important sectors including energy and materials remain behind, with about two-thirds of stocks in these sectors pushing above their 50-day moving averages.

Each of these stocks traded below their 50-day moving averages as of Friday — meaning that, on the whole, they are priced lower now than where they have typically been trading during the last two months. That tends to signal downward momentum.

5. Jobs are better, but still bad

The 7.7% unemployment rate is a four-year low and has people excited about a recovery. But the recovery is still painful, with millions of Americans out of work and millions more underemployed in low-earning jobs. As Dean Baker of The Guardian points out, a strong winter prefaced a dismal spring for job creation in the past few years. So let’s not set off fireworks for employment growth just yet.

6. Little upside left

New highs for the major indices are frequently short-lived. Sam Stovall, chief equity strategist at S&P Capital IQ, told USA Today’s Adam Shell that across 11 bull markets since World War II, “The S&P 500 tacks on an additional median gain … of only 3% in the two months after eclipsing an old high, before heading lower and suffering a decline of 5% or more.”

7. Growth is weak

GDP growth for 2012 totaled 2.2%, a pickup from 1.8% growth in 2011. Most Wall Street experts aren’t predicting much improvement for this year. Can we really have a sustained bull run with such poor numbers? Also, remember that the market ended flat in 2011 after a big surge through spring.

8. Fear ‘The Wedge’

The technical analysis crowd is talking a lot about the current “rising wedge” pattern in the S&P 500 — an extremely bearish chart that typically precedes a breakdown.

A rising wedge chart is characterized by an uptrend in prices but more importantly an increasingly tight range at the point of the “wedge” where buyers lose momentum even if sellers haven’t taken the reins just yet.

Both the long-term and the short-term trends indicate the bearish wedge pattern, and the lack of significantly higher highs and extremely low volume lately may be hinting that these prices are not sustainable.

9. Gasoline prices

Here’s a crazy figure for you: The first time gasoline prices fell in 2013 was March 8. That’s more than two straight months of rising prices.

This trend was mirrored in an ugly fact of last week’s retail sales: More than half the rise in spending was due to higher prices at the pump, not discretionary sales. In fact, excluding gasoline, sales were up 0.6% instead of 1.1%.

10. Winds of change

As a recent Comstock Partners note bluntly puts it, “Rosy forward-looking earnings forecasts that come crashing down are nothing new for the market.”

Be careful of thinking that stocks are cheap based on forward projections that can and will move downward. The same goes for macro data, too; after all, we were in a recession and didn’t even know it thanks to poor GDP forecasting and understatement of the true decline. So before you read too much into better forecasts for the second half of 2013 or into 2014, remember how quickly things can change.

There you have it: A journey into the market’s danger zones. Again, please weigh in with your comments and I will respond where I can.

Coming Tuesday: Read about the market’s bullish signs and join the conversation on Twitter at 2 p.m. ET by messaging Jeff Reeves at @JeffReevesIP. And tag your tweets with the hashtag #bullorbear.

Jeff Reeves is editor of InvestorPlace.com and author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at editor@investorplace.com or follow him on Twitter: @JeffReevesIP. As of this writing, he did not own a position in any of the stocks named here.

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